There is no such thing as a zero sum game

Month: March 2008

Down to dirty work today, as I make the bold claim to start talking about the guts of the economics profession. What are we up to? The first distinction in economics research methodology is ‘theory’ versus ’empirics’. Specialization has gotten to us in a big way here, in that theorists and empiricists don’t really associate at all.

So what’s what? Both methods are trying to attack similar questions – what happens if this changes, how do I achieve this, what is the relationship between these things – but use very different standards of proof. A theoretical ‘proof’ is to create a simplified model of reality to speculate on how the things might be related, while empiricists dig into big datasets to try to find the real-world relationship, the common problem being that things are pretty complicated. When economists talk about “applied economics”, they are using a label for the practice of statistical analysis of data in empirical economics research, so in some sense “applied” is not really an informative word here.

When we actually want to answer questions, say for policy analysis or just because we care, it is obviously smart to draw on diversity and explore the theoretical reasoning behind the relationship you’re interested in as well as whatever suggestive real-world evidence exists. Being that this isn’t what economic research papers do, this isn’t what economists do, though: we all do either one or the other whenever we write a research paper. Every economist is, first and foremost, a theorist or an empiricist (or both, but you see what I mean – they are distinct concepts at all moments).

The problem for empiricists is, in a way, harder than for theorists, because finding meaningful relationships in real data is surprisingly difficult, and assuming something away is a much more technical proposition when you have to kill it in your actual data rather than just in your abstraction. For example, if I see that the airport built a new terminal and that house prices went down, I can certainly argue that one caused the other, but actually proving it is a very different proposition. Econometrics is the branch of economics that tries to develop methods to analyze data where it’s difficult to infer causality. Of course, this problem is common to all statistical analysis, not just economics, and it is surely true that really strong evidence is revealed without fancy techniques.

A lot of economists do “applied economics”. Now this is going to be mostly just an anecdotal claim, but it’s certainly plausible to argue that the things that made economists decide to become economists seldom include a burning desire to trawl through huge datasets and run a bunch of regressions; the questions that can be answered in this way are interesting, sure, but the work itself is not a lot of fun. On top of that, despite the positivist teaching of economics, the proportion of time spent on the empirical methods is very, very small compared to the proportion of economics research that is empirical. Not that this is a bad thing: there isn’t a huge amount you can say about empirical methods before you’re actually in a position to use them (and again: not that much fun), but it might be presenting a drastically skewed picture of what it means to be an economist.

There’s actually a bit of a rift within empirical economics about the role of theory, which is a different matter entirely – I’ll try to paraphrase to the best of my ability. That rift concerns the seed of the empirical test being done – should it be explicitly associated with a theoretical model of the relationship you’re looking for in the data (that’s ‘structuralist’), or should the data be allowed to speak for itself and leave models out of it (‘reduced form’)? Now, the funny thing is that, as we know, it’s possible to write down a self-contained and consistent theoretical model that proves any relationship you want; the value of the model depends entirely on how you judge the value of its own little world. Thus, employing theory as some kind of dual proof while doing empirical work is actually redundant; it can offer some clarification of what you think might be driving the relationship you’ve found in the data, but it’s not especially helpful to say “hey, I found this empirical evidence – and look, the model says the same thing!”.

Which, again, is different from the idea of puzzling out a theoretical idea then trying to find evidence to see if it’s true or not. This kind of thing is actually not incredibly popular, perhaps because of the vastly different worlds theorists and empiricists orbit in – different methods, different seminars, different journals. The paradox is thus that very little empirical economics research actually tests theoretical economic hypotheses. Does each approach lend itself to different questions, never the two to meet, or is it in fact just that we don’t like following on each others’ coattails?

Back to the big point. Let’s say I’m a research economist and I’m thinking of a question like this: “would a national health service be good for the United States?” What I will not end up doing is writing an answer to that question, drawing on the arguments and evidence from a variety of sources. The economist’s role in answering such questions depends on which flavor of economist he is. The theorist might end up asking “how would it change the problem for an individual if they were faced with a national health service rather than the current system?” She might create a little model of a person facing choices between spending their money on health care or on other things, who goes on to interact with an insurance company in one instance or the new health service in the other, and figure out how that person’s choices might plausibly change.

The empiricist might end up asking something like “how does the size of a deductible affect people’s health care spending?”, since this might tell us something about the zero-deductible world of national health care, or “how do wait times affect health outcomes?”. Note that to answer the original question – should the US switch systems – using any kind of data, or indeed any kind of theoretical model, is staggeringly complicated and difficult.

Neither type of economist actually writes about the answer to the big question in their academic research. Instead, they go to the questions that their method might be able to answer, making just one brushstroke on the painting of the argument, and for theorists and empiricists, those questions are very seldom the same.

Word reaches my desk this afternoon of an interesting-looking new book on the horizon, called “The Foundations of Positive and Normative Economics“, an essay collection edited by Andrew Caplin (of the monkey brains) and Andrew Schotter. Details are a bit sketchy, but the idea is just fine with me. I have a high tolerance for this kind of thing, and hopefully it lives up to my expectations.

On that note, I hope for something a bit different to the endorsement quotes on the book’s rather empty webpage:

“Are you puzzled by the implications of behavioral economics? Are we in the throes of a paradigm shift? Is neoclassical economics refuted? Economic methodology has never been more disputed. If you want to be part of the debate, this book is the place to start.”–Ken Binmore, University College London

I still don’t see this distinction between ‘behavioral economics’ and ‘neoclassical economics’, to be honest (see here, for example). Why is a different model of people an abandonment of neoclassical economics? ‘People maximize stuff’ is my minimalist description of neoclassical economics, and the behavioral set is just trying to figure out what the stuff is. Again (again, again), since it’s not possible to test rationality, the ‘maximize’ bit just has to float out there unattached.

I don’t really get this one either:

“Should economics take account of neuro-physiological data? Can subjective states of mind play a useful role in economic analysis? These and other provocative questions are examined and debated in this fascinating volume of essays from some of the deepest thinkers in contemporary economics.”–Eric Maskin, Nobel Laureate in Economics, Institute for Advanced Study

Maybe I’m behind the curve on this one, but I’m not sure what that really means. It gives the impression that this book might be predominantly concerned with the implications of psychological and neurological research, but to me all that is really something different from the epistemological question of what positive and normative economics are doing for us, where they came from and where they’re going. The state-of-the-art in economic theory or modeling is one thing, but I hope the book tackles the big questions rather than obsessing about the value of behavioral evidence.

I disagree fundamentally that “economic methodology has never been more disputed”, hence the futility of chipping away at the tiny and ultimately boring debates at the root of modern research. The assumptions, the beliefs can surely differ, but I think the approach is set on some fundamental level. Superficial differences in approach do not go down very far: yes, a ‘behavioral economist’ might be searching for realism by figuring out how people act, and an ’empirical economist’ is running regressions on cleverly constructed data, a ‘theorist’ is off in the land of abstraction and algebra, but all are operating on the same field of positive economic science. The real question is how we got to be that way, not why some economists do one thing and some another. That’s the question of the foundations of positive and normative economics.

Time for round two of economics euphemism bingo! This time I was especially exasperated because the article in question (from BBC News) is about the China-Tibet issue, not about business or stocks or some place where the euphemisms hide something unimportant.

Let’s wade right on in:

“Some say that is not practical – that an independent Tibet would not be viable. It might struggle to cope economically.”

Wouldn’t have enough money? Lack of resources? Lack of infrastructure?

“A “one-country, two-systems model” is one possibility. So far, that model has gone well in Hong Kong – although Hong Kong and Tibet are at very different stages of development.”

OK, tell me about the differences, then. What’s a ‘stage of development’? Why is it important?

“When they revised their plans for Tibet in the aftermath of the late-1980s protests, China’s leaders thought a programme of rapid economic development in Tibet would stifle calls for political change.“

Economic development how? More money? More resources? More investment?

Tibetans are frustrated despite heavy economic investment.

Delete economic? What is economic investment? What is non-economic investment?

To me, it’s just lazy. Just say what you mean. The word “economics” is not a crutch or a bin into which you sweep all the stuff you don’t want to talk about. Just stop using it altogether.

Apparently there’s a “Trade Adjustment Assistance” program on the Senate radar. Now, this could be considered sensible economic policy, whether or not you agree with it.

“The Trade Adjustment Assistance program is designed to compensate manufacturing sector workers who are displaced by trade. It includes financial support for education and training, a health care credit, wage insurance and other goodies.”

It’s a well-worn argument that long-term benefits from trade with other countries might come with short-term costs for those workers who find employment in industries which produce goods most likely to be imported. Social justice might argue for support for such workers; help the worker, not the industry is not an original maxim. It can be applied equally to “dying” industries. If the typewriter industry is becoming obsolete, do you subsidize the typewriter producers or let them die and use your welfare state to support the people who are affected?

Maybe it’s too harsh to say that this is not a textbook argument, but one certainly can’t gloss over the negatives of any policy, no matter how positive the positives, and, recall, those pesky Principles of Economics said that Trade Can Make Everyone Better Off.

The Salon article refers to this, from The Atlantic, makes the forceful and obvious point (I will paraphrase) that a proper welfare state doesn’t ask why, just helps the needy while they need, and that this trade adjustment business is a band-aid, a facsimile of a real solution for the problems of the consequences of harsh and widespread unemployment in whole communities at a time.

Not to wade into the politics where I don’t belong, but I like this:

“Preaching the benefits of free trade without being willing to take care of the “losers” created by trade isn’t very bright in an election year when workers are feeling squeezed, and the opposition party controls Congress.”

Ignoring the electioneering stuff, the direct analog to an economics class or an economic policy debate would be to actually have a proper debate, an acknowledgment that everything isn’t always super-awesome. Similarly, the Economist’s View take:

“It seems to me that an administration that truly cared about the working class would be eager to find a way to help those who are hurt from trade, that they would make it a high priority and insist it get done, but there’s little indication – through actual action – that helping workers hurt from trade, or from economic conditions more generally, is a priority.”

This is perhaps one of the biggest economic policy questions: how big should your welfare state be? Design is one thing, but we have a fundamental philosophical question here, which is bigger than technicalities. Let’s brawl that one out, historically, globally, politically, morally, economically.

Except for poor old John McCain, who gets kicked again. Hard. I’m on record: I think he is an economist (for a suitable definition of economist). Not Economist’s View.

“I think a lot of people are missing the point about John McCain’s lack of knowledge about economics… Anyone who really cared about economic policy and its effect on households would have taken the time to become familiar with the basics. How will he know how best to help workers if he has no idea about the underlying economics? If he asked, there are very prominent economists who would be happy to spend an hour once or twice a week – kind of like a principles course – explaining how the economy operates. But he never bothered, never took the time, because he apparently doesn’t care enough to give up the time necessary to actually understand the polices he is voting on. I wouldn’t mind the ignorance so much if there was any indication at all that he had tried to over come it, any indication he thought it was important enough to learn about, but there isn’t.”

We’re going to give McCain the Principles of Economics course? I just got chills. Surely not the one we give the poor undergraduates? From me:

“A list of “principles” pregnant with loaded statements is not the right way to present our discipline.”

This is certainly frivolous, but in the spirit of the addictive six word memoir (see here and here), I got to wondering about the six word memoir for the traditional undergraduate Intermediate Microeconomics course. My best effort is:

“Markets work, except when they don’t.”

Intermediate Microeconomics is a course I have both taken and lectured. It’s the gateway drug to economics electives, in a way that the Principles courses I hate so well are not: it is dry and musty with terminology, calculus and diagrams. Relating student to material is the difficult part, as with all of these positivist courses. When I took the course, it was split half and half between the dry stuff and policy debates that applied it, which was perhaps a good idea.

A six word syllabus for Micro?

“People, firms, markets: now with calculus!”

The technical parts of the course are about the foundations of all scientific theoretical economics: how we can model people, how we can model firms, how we can model interactions. It builds, in my opinion, towards the two monumental political economic results in our canon, our intellectual arguments for and against markets as a resource allocation mechanism. They are the first and second theorems of welfare economics. The first one sets out the conditions under which markets will give a Pareto efficient allocation of resources, and the second one sets out the conditions which would make lossless redistribution of resources possible.

First of all, these are tremendously elegant, in the mathematical sense. Second, they are utterly unrealistic. Together, this makes them a fascinating and infuriating jumping-off point for all debate about the appropriate way to allocate resources, in specific situations and in the wider sense. They don’t answer the questions. They beg us to ask when we can do better; they beg us to ask what better even means. All philosophical, moral and political debate on economic policy bursts fractal-like from these seeds, the painstaking culmination of the “how”, the layering of the interactions of all the actors in the economy.

That’s when technicalities can become interesting. It made me want to follow those paths where they led.

Just in time to miss the question of economics as vocation versus learning for its own sake comes this article from BBC News. “French students shy of the real world”, it says, and the message is that France is a mess because French students are intellectually curious. Perhaps I paraphrase slightly.

France may be a global leader in high technology, but employers complain that today there are far too few students studying science and technology and there are far too many studying “soft subjects” which leaves them ill-prepared to join the real world of work.

I asked a passing student what he wanted to do when he left university. “I want to be an eternal student, ” he said. “Just learning for learning’s sake.”

Fair enough, that might not get a great deal done in the scheme of things, but what a great sentiment. We are, after all, talking about a rich country here. Some young people will surely become scientists and engineers, if that’s what they want. Some other young people will find that a “soft subject” (?) will be the one that stimulates them to want to know and to learn. The luxury afforded to the people who do not struggle to find food to eat or a place to live is to indulge in pursuits like these. We can afford to foster excellence in knowledge and learning, whatever form it may take.

Or we could start a state-run forced labor program.

“But with such poor economic growth and such huge public debt, this country now needs its clever young students to leave the university campus and start ploughing their skills and enthusiasms into the profitable world of work.”

Chills. Why not just set up labor camps and get it over with? Who said anything about “growth” or “profitable”? Didn’t the student just tell you he wants to simply learn? Was it not once the case that universities and learning were valued on their own merits? Can the technical and vocational not coexist with the abstract? I know there exist some non-technical careers out there for which the key requirement is “intelligent”. As an employer, maybe I need scientists, but maybe I need people who are bright and creative and literate.

As I argued yesterday, there are particular implications for a field like economics which is torn between feeling itself purely vocational and purely not. This French debate then mirrors the tension at the heart of the teaching of economics; can it not be OK to pursue this field because it’s interesting?

Then it’s bizarre that it feels like many students take economics courses not because they enjoy them or because they are vocational. Perhaps economics just looks good, perhaps even because it’s confused with finance or business. Perhaps we, the educators, are complicit in the charade because it brings high enrollments and money. There is no incentive to change the program, even if the core is rotten. It’s like an asset bubble – the value of economics as a major, the value of economics to a university, to economics departments, goes up and up and up, but at the bottom there is nothing.

Maybe, maybe not. Maybe there is something down there. But if it’s not intellectual curiosity, a desire to know, then what is it?

Being that we have not the faintest idea why people choose to take economics courses, this will be a difficult question to answer: is economics vocational? What exactly would an economics education prepare you for?

My stereotypical economics major wants to be an investment banker or something of the sort (again, pure prejudice, since no evidence exists). I argued a while ago that maybe – maybe – the sub-discipline of finance could possibly be considered vocational for those types. Economics courses will be of no practical help, although I suppose the civics that passes for Econ 101 might help with terminology. My advice: go to a school that will let you major in business.

So: what would an economics education prepare you for? To be more explicit: “if I major in economics, what will I be able to do, or be better at, that I couldn’t otherwise have done, or done so well?” Some suggestions, and justifications.

Statistician or data analyst. Econometrics is usually a requirement for all economics majors. Since the computing revolution, economists have lovingly embraced statistical analysis as a way to coax the relationships in the real world out of data. Theoretical and practical data preparation and analysis will be practiced in econometrics courses, and any course falling under the foul name of “applied economics”.

Policy wonk. Economics can inform argument and debate about policy. This is especially true of economics courses that straddle positivist analysis and normative debate, such as public economics. The purely esoteric economics courses might not be the ideal ones to make this point.

Philosopher. Economics contains a lot of points of philosophical debate. “Welfare economics”, which tries to discuss and provide metrics for normative goal-setting, is a particularly rich field for flights of fancy. The realness of economics does not take it out of the philosophical world; it’s elusiveness holds it in.

Applied mathematician. I’m very doubtful about this one, but here it is anyway. Economics can’t teach you math. Plus, economists are like the chimps jumping up and down to reach the fruit when we could just ask the giraffe – it feels like any mathematical or technical problem we have would be immeasurably simpler for a mathematician or computer scientist to solve than it is for the economist. Nevertheless, it may well be the case that studying economics could make a person better at applying mathematical methods to the tangible.

Academic economist. Our courses are taught with the same positivist motivation demanded in the research conducted by academic economists. The “applied” courses accomplish this for the type of researcher who does data work, and the theoretical courses accomplish it for the type of researcher who does, well, theory work. I’m worried by the lack of diversity in the models and applications we present – it doesn’t reflect the range and power of economics – but nevertheless, the method we present is, for better or worse, the same as the method we use.

Historian / person-of-the-world. No idea what I should be calling this, but an economics education should (should) include some history of thought and history of economic policy. One of my favorite college courses was one where we took one simple, flexible model of a country’s economy – really simple, just pictures and words – and used it to debate the economic history of the 20th century. Whatever that type of knowledge-for-its-own-sake is called or is useful for, I’m throwing it in this list.

I’ve kind of exhausted my ideas. Now, at least here in American colleges – or maybe just this American college, though I suspect not – “academic economist” gets far, far, far, far too much play. Far more than anything else on my list or anything else that could be on the list. I would be utterly astonished if the non-existent evidence on why people take economics courses showed that they all wanted to do write academic articles in economics. Astonished and miserable. Yet, here we are, in a situation where economics courses are most commonly run without philosophy, history, politics, debate.

Academics do economic science in a vacuum without these things. It has to be that way, because we want to isolate facts as well as we can isolate them. That doesn’t mean that we should be teaching economics that way. It could be so rich. Yes, the science can be interesting, but so can the history of the world, the intellectual foundations of the discipline, the policy debate built on the evidence. I’d hate to think we’re robbing our students of these things.

Perhaps the answer, then, is that economics is not fundamentally vocational. Aside from my pet issue of economics-abused-as-civics, we have a problem with economics teaching if it is trying to pretend to prepare people for something specific. It can surely help a person develop skills, but at least as important, and probably more interesting for the average student, is teaching economics as an intellectual pursuit for its own sake. We know what would make our courses more interesting (not the same thing as pandering, I hasten to add), more intellectually exciting, yet we pull back. Is it because we believe we’re training all our students to be academics?

“The Catechism of the Catholic Church states that “immediately after death the souls of those who die in a state of mortal sin descend into Hell”. The new mortal sins were listed by Archbishop Gianfranco Girotti at the end of a week-long training seminar in Rome for priests.”

I’m trying not to blaspheme here, but what a minefield. Let’s try to ignore from the start the problem that all the things that they’re trying to avoid here are covered by the good ol’ seven deadlies. Right off the bat, “morally debatable experiments” is semantically identical to “experiments”, so science is a sin. At least “genetic manipulation” fits with the ethos of the Church. I have no idea how one “inflicts poverty”. Define “drug”. Define “rights”. Define “excessive”. Ugh.

Anyway, the economics-related point here is that this made me think of the “value of income” stuff from yesterday. Is it OK to “accumulate excess wealth” if you use it to alleviate poverty, or are we to be banned from accumulating wealth altogether? Is the Church guilty of ignoring the righteous consequences of an expansion in the amount of stuff to go around? If we can’t do productive stuff, will that “inflict poverty”? I feel like this in an implicit damnation of capitalism, but the moral judgment of capitalism – just like the moral judgment of socialism, anarchism or indeed anything – is not that easy.

I actually think it makes it worse that this comes from an obviously traditional institution. It’s great that there are forces out there trying to promote social awareness and conscience, but that list is ridiculous. Give me pride, envy, gluttony, lust, anger, greed and sloth, and stop trying to be trendy.

“But there is a much bigger problem, one that challenges the very foundation of the presumed link between per-capita G.D.P. and economic welfare. That’s the assumption, traditional in economic models, that absolute income levels are the primary determinant of individual well-being.”

It’s déjà vu all over again, as they say. I’ve challenged this before (see here for GDP, here for money and here to hammer the point home), and of course money-centrism remains misconception number one about the practice of economics, especially the type of welfare economics the article is talking about. Again, I can only reiterate that agnosticism over people’s likes and dislikes is a tenet of the practice of economics, and assumption and approximation only serve to make our questions answerable.

Getting off that familiar track, this instance is actually especially fun because it comes from a New York Times article which begins:

“DOES money buy happiness? This week, Senator Byron Dorgan, Democrat of North Dakota, will join a long line of people who have taken serious stabs at trying to answer that thorny question. He will hold a hearing exploring whether traditional economic measures like per-capita income accurately capture people’s sense of well-being.”

Strange how Senators spend their time, really. Surreality aside, Robert Frank, the author of the article, does cite some neat hypotheses on the money issue, so I’ll try to forget the economics equals money lament for a second. The object of investigation is how income inequality affects general wellbeing.

“[surveys find] that when everyone’s income grows at about the same rate, average levels of happiness remain the same. Yet at any given moment, the pattern is that wealthy people are happier, on average, than poor people. Together, these findings suggest that relative income is a much better predictor of well-being than absolute income.”

That’s probably bad news for the Senator. I propose Dorgan’s Razor: to make everyone happy, make each person richer than everyone else. Oh dear. Is that a depressing impossibility result? If everyone had the same income, would we all be miserable because we were all no better off than anyone else? Seems a little extreme. Perhaps that points to the weirdness of the money metric generally.

It’s not all bad news, though:

“Yet in many other categories, greater levels of absolute income clearly promote well-being, even in the richest societies. The economist Benjamin Friedman has found that higher rates of G.D.P. growth are associated with increased levels of social tolerance and public support for the economically disadvantaged. Richer countries also typically have cleaner environments and healthier populations than their poorer counterparts.”

I see this as broadly similar to the importance of economic growth for the poor; whatever the value of GDP or income as a measure of individual wellbeing, it’s surely the case that societies with more resources can simply afford more, in the truest sense. Those societies can afford more social spending, more sacrifice of stuff for environment, more health; the equivalent of poor countries being able to afford more when less people have to break their backs in subsistence farming.

It’s also related to things like the pension “crisis” in aging countries like America, Japan and Britain. The more stuff there is to go round, the less acute the problem of providing “enough” for both the workers and the retired becomes, regardless of how many of each type there are. Further still, it’s related to philanthropy, which this article contorts itself to provide an evolutionary explanation for. Philanthropy on the Gates Foundation scale cannot exist without affluence.

Senator Dorgan should be applauded for asking the question of what the goal of GDP growth really means for the wellbeing of the population. A richer set of goals could well be a good thing; perhaps we would be willing to sacrifice some income for greater equality, a healthier environment or the alleviation of global poverty. It’s important, though, to ask about the value of affluence not just for the individual but on a large scale too.

Not to get too “Dear Diary”, but I am reading “The Wind-Up Bird Chronicle” by Haruki Murakami, and, lo, the protagonist’s brother-in-law is an economist.

On academia:

“Noboru Wataya chose to remain in academe and become a scholar. He was no fool. He know what he was best suited for: not the real world of group action but a world that called for the disciplined and systematic use of knowledge, that prized the individual skills of the intellect.”

Noboru’s book, a perfect parody of economics books everywhere:

“Noboru Wataya published a big, thick book. It was an economics study full of technical jargon, and I couldn’t understand a thing he was trying to say in it… I couldn’t even tell whether this was because the contents were so difficult or the writing itself was bad… Two expressions he had coined, “sexual economics” and “excretory economics,” became the year’s buzzwords.”

Freakonomics, anyone? Fashionomics? Freedomnomics? The most delicious morsel of the lot is Noboru’s approach to public debate, what could be the credo and the damnation of positivist economics:

“But if you paid close attention to what he was saying or what he had written, you knew that his words lacked consistency. They reflected no single worldview based on profound conviction. His was a world that he had fabricated by combining several one-dimensional systems of thought. He could rearrange the combination in an instant, as needed. These were ingenious – even artistic – intellectual permutations and combinations. But to me they amounted to nothing more than a game. If there was any consistency to his opinions, it was the consistent lack of consistency, and if he had a worldview, it was a view that proclaimed his lack of a worldview. But these very absences were what constituted his intellectual assets. Consistency and an established worldview were excess baggage in the intellectual mobile warfare that flared up in the mass media’s tiny time segments, and it was his great advantage to be free of them.”